Meet the ‘Tax Extenders’

This fall, a strange-looking package of tax breaks is likely to
come before Congress. If the past is any indication, it’s going to be pushed
through at the very last minute, just as lawmakers are getting ready to leave
for their Christmas recess. There’s a break for Puerto Rican rum, one for
NASCAR tracks and another that rewards corporate research and development spending. And one of them—this is not a typo—is an exception to an exception to an exception to a tax rule. It benefits multinational banks.

Insiders call
them the “tax extenders,” a knot of handouts large and small that moves totally
separate from the tax code and has become an illustration of just why the federal
budget is so hard to manage—or even to understand.

This year’s batch,
which the Senate wants to renew for two years, is projected to cost more than
$85 billion. Though tax experts scoff at many of the provisions, they’re
rubber-stamped with minimal scrutiny or debate. And though they’re considered
temporary, they’re rarely allowed to die.

Over the years,
the roster of tax extenders has grown prodigiously. The very first
extender bill, the Technical and Miscellaneous Revenue Act of 1988, included
eight provisions. By 1992, there were a dozen, and some lawmakers were already
bemoaning the practice. “The free ride stops here,” then-House Ways and Means
Committee Chairman Dan Rostenkowski (D-Ill.) declared that year. It didn’t. The number
of extenders kept growing, and this year Congress is set to extend more than 50
provisions. Some have been renewed more than a dozen times.

The strange
status of these tax breaks is a testament to budget gamesmanship. Lawmakers say
they want at least some of the provisions to be a permanent part of the code.
But Congress’ budgeting rules require lawmakers to consider the 10-year cost
of any new provision—and viewed through that lens, these breaks suddenly seem
too costly for many lawmakers to pass. So they approve them as one- or two-year
“extenders,” slashing the apparent price tag, and they slide right through.

It’s also a
triumph of lobbying. Some lobbyists deliberately try to get their pet
provisions mixed in with the extenders, knowing they’ll likely be rolled over
for years to come. And the perpetual threat of expiry keeps those lobbyists in
business.

Some of the
provisions are so obscure that even tax experts struggle to explain what
problem they’re supposed to be solving (“Modification of tax treatment of
certain payments to controlling exempt organizations,” anyone?). So what’s
really tucked in there? Here’s a quick guide to some of the provisions that
will soon come up for renewal.

THE
UNIMPEACHABLE:
One of the least controversial extenders allows teachers who spend their own
money on classroom supplies to take a $250 deduction on their taxes. This
provision is one of the smallest extenders, projected to cost just $457 million
over the next two years. But it gives a nice gloss to the whole extenders
package and makes it harder for lawmakers to vote against it as a bundle. Who
opposes giving teachers who spend their own money educating your child a break?
This year, the Senate wants to slightly expand the provision by indexing that
$250 cap to inflation, and allowing teachers to use it for professional
development expenses.

THE
STIMULUS THAT WON’T DIE: Long after Congress allowed stimulus-era expansions of food
stamps and unemployment benefits to die, it continues to renew a break called
“bonus depreciation,” aimed at boosting business investment. By some measures
the single biggest extender, bonus depreciation is so large it can
singlehandedly ruin the government’s deficit projections (One reason the
shortfall next year is projected to total just $414 billion is that it doesn’t
include the $90 billion hit that renewing bonus depreciation would bring). Bonus
depreciation allows companies to write off a huge share of their investments in
new equipment by immediately taking expense deductions they’d otherwise have to
drag out over a number of years. It was supposed to be a temporary incentive to
get companies to make investments amid the Great Recession that they’d
otherwise put off. But it’s been repeatedly renewed thanks to industry lobbying—and a quirk in the budget rules that make it appear to only cost $3 billion.

THE
NEWBIE:
For the past decade, Congress has offered special tax breaks for television and
film productions. Some might ask why. Others might ask: Why not plays? New York
Sen. Chuck Schumer felt the breaks were unfair to Broadway, so this year, the
Senate’s tax-writing committee gave theatrical productions the right to write
off their first $15 million in expenses immediately, rather than having to take
them over a number of years. Projected cost: $2 million.

THE
COMPLICATED WALL STREET THING THAT NO ONE ELSE UNDERSTANDS: There’s a very
large tax extender called the “exception under subpart F for active financing
income,” which, astonishingly, is an exception to an exception to an exception to a tax rule. Lawmakers used
to have big fights over this issue, which benefits multinational banks. The
short version is that it lets financial firms postpone paying tax on interest
and dividends they earn overseas, which is considered taxable income for other
companies. Banks enjoyed this special treatment for years before it was
revoked in the 1986 tax reform. When congressional Republicans reinstated it in
1997, President Bill Clinton tried to kill it with his short-lived line-item veto,
which the Supreme Court soon threw out as unconstitutional. Lawmakers don’t
debate this one much anymore; they just tack it onto the tax extenders. The
Senate plan to renew it would cost $13.4 billion, making it one of the biggest extenders.

THE
MCCONNELL HANDOUT:
Though earmarks have been banned for years, there are still some ways to serve
up pork, and the tax code is one of them. One extender allows racehorse owners
to deduct the cost of their animals over three years, while under the old rules
they had to wait as long as seven years. It was created at the behest of Senate Republican leader Mitch McConnell, whose home state of Kentucky is horse
country. This was originally included in the 2008 farm bill, but it’s since
migrated over to the extenders. Budget scorekeepers say it will cost $160
million over the next two years.

THE
ORIGINAL:
By most accounts, a credit subsidizing corporate research and development
programs is the original extender. It was first included in President Ronald Reagan’s
1981 tax cuts amid a concern about a slowdown in private R&D spending. It was
offered on a temporary basis until 1985, tax lore has it, because lawmakers
were unsure how effective it would be. They revised and renewed it for another
three years as part of the 1986 tax reform, and it’s been rolled over ever
since. This provision is hugely popular among lawmakers in both parties, though
economists have questioned whether it’s really just paying companies to do
research they’d do anyway. It will cost about $22 billion to re-up it for
another two years, and this year the Senate wants to expand it by allowing
not-yet-profitable startups to claim it as a credit against payroll taxes.

THE
HOUSING-CRASH SPECIAL: Normally, if you have debt forgiven, the IRS counts it as income
and requires you to pay taxes on it. This became a problem during the recent
financial meltdown when millions of Americans underwater on their mortgages had
their debts forgiven, only to be confronted by enormous tax bills. So Congress
passed the Mortgage Debt Relief Act of 2007, which was later renewed as part of
President Barack Obama’s stimulus package. It lives on today as part of the extenders,
with the Senate proposing to renew it for another two years at a cost of $5
billion.

ONE
FOR THE GREENS:
The extenders includes a major subsidy for the wind industry. Known as the
renewable energy production tax credit, it’s designed to help capital-intensive
wind farms get off the ground. But it’s come under growing criticism,
especially from Republicans, because it’s a relatively rich subsidy that
Congress has now been offering for more than 20 years—and a backdoor way to
play favorites with energy policy. Originally approved as part of the Energy
Policy Act of 1992, the credit has been renewed 10 times, prompting some to ask
if it will ever end. Not for at least another two years, if the Senate gets its
way. Its draft of the extenders package would roll it over through next year at
a cost of $10 billion.